If you’re a LibCon, put that in your pipe and smoke it

Barring unscheduled interruptions, the next big event in the UK’s financial calendar is the emergency Budget on 22nd June. The country is waiting with baited breath as the new LibCon coalition tells us our fate in relation to both inheritance tax and capital gains tax. The LibDems have clearly put paid to tax breaks on the former, meaning that many in Middle England will continue to pay inheritance tax at 40% on their not very big estates. This battle has already been publicly trailed and lost, but what of the growing furore over capital gains tax?

Lest we forget the capital gains tax rate is currently fixed at 18%, with entrepreneurs’ relief potentially resulting in an effective tax rate of 10% on up to £2 million of qualifying lifetime gains. For the ten years to 6 April 2008 capital gains tax rates were linked to income tax rates and the main feature was taper relief reducing gains depending on length of ownership and whether the disposal was of a business or a non- business asset. Higher rate taxpayers disposing of a business asset could pay tax at an effective rate of 10% on the entire gain realised. This replaced an entirely different regime with indexation allowance to allow for inflationary gains. Why do they keep changing it?!

Anyway, the point is that there are coalition moves afoot to change the system yet again, this time to increase the rate to something that approximates to income tax rates. Everybody seems to be taking this to be 40% at the top level, with generous exemptions for entrepreneurs, but nobody really knows. The result is that Middle England is revolting. By that, I mean that they are up in arms. How could the Conservatives allow this? After all, it strikes at the very heart of the nation!

Enter Arthur Laffer, the well known economist, who specialises in telling governments that higher rates of tax result in a lower tax take. He says that raising capital gains tax rates will reduce total capital gains; lower total profits; lower total investments; reduce wages and reduce total employment. He says it’s about as bad an idea for the UK as he could imagine.